401k withdrawal limit

[Guest robertcusick]

One of my clients - who has terminated employment - is being told that his 401k plan limits his ability to rollover or withdraw his salary deferrals to $15,000 prior to age 55.

Is this legal? I was not aware that plan documents could restrict terminated employee access to salary deferral contributions.

[stephen]

If memory serves, the plan could say NO DISTRIBUTIONS OF ANY TYPE until the participant meets Normal Retirement Age as defined in the plan.

I do not know why a plan sponsor would want to force all participants to keep their money invested in a RETIREMENT plan until they met RETIREMENT as it would be a burden to keep up with all of these participants for such extended periods of time and could cause a plan that may not otherwise become a large plan filer to meet the audit requirement number of participants and such a requirement could be a deterrent to keep people from contributing to the plan.

That said, the participant should review their copy of the Summary Plan Description (or request one from the plan sponsor) to confirm what the plan's distribution restrictions are.

[Guest robertcusick]

Thanks for the feedback.

I am awaiting a copy of the SPD, but according to Fidelity, the plan custodian, the plan doc says "withdrawals are limited to a lump sum of $15,000 prior to age 55"

My client would prefer to get his money out. Is there recourse?

[stephen]

Sorry, but if the document says you have to wait well then you have to wait.

The participant could contact the Plan Administrator and confirm the $15,000 distribution restriction applies to terminated employees and ask "Why their plan forces these distribution restrictions on participants?".

[JanetM]

Your client can appeal the denial. Then he would be entitled to a written explanation why he is limited. If the plan does not allow distributions he won't get one.

[Belgarath]

Your client is out of luck (assuming the plan/SPD is properly drafted). As Stephen mentions, there is no requirement to allow distributions prior to NRA. See IRC 401(a)(14). If the $15,000 limit were discriminatory in favor of the HC, that would be a problem, but it isn't - it favors the NHC, so no discrimination issues.

Some plans prohibit any distributions prior to NRA, for various reasons. In our small employer market, this is chiefly becasue they don't want to encourage turnover, and they don't want to provide easy access to funds for an employee to leave and set up a competing business.

And although your client can attempt to get the plan to change this provision, the plan sponsor/Administrator is under no obligation to give the reasons for this policy.